The loan process comes with its own vocabulary. Here are plain-English definitions of the terms you'll actually encounter, organized alphabetically. Bookmark this page and refer back whenever a lender or document loses you.
A - C
- Adjustable-Rate Mortgage (ARM)
- A mortgage whose interest rate changes periodically after an initial fixed period. A "5/1 ARM" is fixed for 5 years, then adjusts every year based on a market index plus a margin, subject to caps.
- Amortization
- The schedule by which loan payments gradually pay off the balance. Early payments are mostly interest; later payments are mostly principal. See it in action with our Amortization Schedule Generator.
- Annual Percentage Rate (APR)
- The true yearly cost of borrowing, including the interest rate plus most fees and closing costs. Always compare loans by APR, not just interest rate.
- Appraisal
- A professional estimate of a property's market value, ordered by the lender to confirm the home is worth the loan amount.
- Balance Transfer
- Moving credit card debt to a new card, usually to take advantage of a low or 0% promotional interest rate. Typically costs a 3-5% fee.
- Closing
- The final step of a loan: signing documents, paying closing costs and down payment, and (for a purchase) transferring ownership.
- Closing Costs
- Fees paid at closing — origination, appraisal, title insurance, recording fees, prepaid taxes and insurance. Typically 2-5% of the loan amount.
- Closing Disclosure (CD)
- The final, binding statement of your loan terms and costs, which lenders must provide at least 3 business days before closing. Compare it against your Loan Estimate.
- Co-Signer / Co-Borrower
- A person who signs the loan with you and is equally responsible for repayment. A co-borrower's income counts toward qualification; the debt appears on both credit reports.
- Conventional Loan
- A mortgage not insured by a government agency, typically requiring a 620+ credit score and following Fannie Mae/Freddie Mac guidelines.
- Credit Utilization
- The percentage of your available credit card limits you're currently using. Keeping it under 30% (ideally under 10%) helps your credit score.
D - F
- Debt-to-Income Ratio (DTI)
- Your total monthly debt payments divided by gross monthly income. Most lenders want it below 43%. Check yours with our DTI Calculator.
- Default
- Failure to repay a loan as agreed. Consequences range from late fees to foreclosure or repossession.
- Down Payment
- The cash you pay upfront toward a purchase. On mortgages, ranges from 0% (VA/USDA) to 20%+ (avoids PMI on conventional loans).
- Earnest Money
- A deposit (often 1-3% of the price) made with a purchase offer to show good faith. It's credited toward your down payment at closing, but can be forfeited if you back out without a contingency.
- Equity
- The portion of your home you actually own: market value minus loan balance.
- Escrow
- An account your lender maintains to pay property taxes and homeowners insurance on your behalf, funded through your monthly payment. Also refers to the neutral third party holding funds during a purchase.
- FHA Loan
- A mortgage insured by the Federal Housing Administration, allowing credit scores as low as 580 with 3.5% down (500 with 10% down). Requires mortgage insurance premiums (MIP).
- Fixed-Rate Mortgage
- A mortgage whose interest rate never changes. Predictable payments for the full term.
- Foreclosure
- The legal process by which a lender takes ownership of a home after the borrower stops making payments.
G - L
- Hard Inquiry
- A credit check performed when you apply for credit. Can lower your score by a few points. Multiple mortgage inquiries within a 14-45 day window count as one.
- HELOC (Home Equity Line of Credit)
- A revolving credit line secured by home equity. You draw funds as needed during the draw period and repay during the repayment period, usually at a variable rate.
- Homeowners Insurance
- Insurance covering damage to your home and liability. Lenders require it, and it's usually paid through escrow.
- Interest Rate
- The percentage a lender charges annually to borrow the principal. Unlike APR, it excludes fees.
- Jumbo Loan
- A mortgage exceeding the conforming loan limits set for Fannie Mae/Freddie Mac. Usually requires stronger credit, larger down payments, and more reserves.
- Lien
- A legal claim against a property as security for a debt. Your mortgage is a lien; unpaid taxes or contractors can create others.
- Loan Estimate (LE)
- The standardized 3-page form lenders must send within 3 business days of your application, detailing estimated rate, payments, and closing costs. Designed for side-by-side comparison shopping.
- Loan-to-Value Ratio (LTV)
- The loan amount divided by the property value. An 80% LTV or lower avoids PMI on conventional loans.
M - P
- Mortgage Insurance (PMI / MIP)
- Insurance that protects the lender if you default. Private mortgage insurance (PMI) applies to conventional loans with under 20% down and can be removed at 20-22% equity. FHA's version (MIP) usually lasts the life of the loan.
- Origination Fee
- The lender's charge for processing your loan, typically 0.5-1% of the loan amount.
- Points (Discount Points)
- An upfront fee (1 point = 1% of the loan) paid to lower your interest rate. Worth it if you'll keep the loan long enough for the monthly savings to exceed the upfront cost.
- Pre-Approval
- A lender's conditional commitment to lend, based on verified income, assets, and credit. Stronger than pre-qualification.
- Pre-Qualification
- An informal estimate of what you might borrow, based on self-reported information and usually a soft credit pull.
- Prepayment Penalty
- A fee some loans charge for paying off the balance early. Ask about this before signing — most mainstream mortgages no longer have one.
- Principal
- The amount you borrowed and still owe, excluding interest.
R - Z
- Rate Lock
- A lender's guarantee of your quoted interest rate for a set period (usually 30-60 days) while your loan closes.
- Refinance
- Replacing an existing loan with a new one, usually to get a lower rate, change the term, or take cash out. See our refinancing guide.
- Reserves
- Liquid savings remaining after closing, measured in months of housing payments. More reserves strengthen your application.
- Secured Loan
- A loan backed by collateral (a house, a car, a savings deposit). Lower rates, but the collateral can be taken if you default.
- Soft Inquiry
- A credit check that doesn't affect your score — checking your own credit, pre-qualifications, promotional offers.
- Title Insurance
- Insurance protecting against defects in the property's ownership history, such as undisclosed liens or ownership disputes.
- Underwriting
- The lender's process of verifying your income, assets, credit, and the property to make the final loan decision.
- Unsecured Loan
- A loan with no collateral, backed only by your promise to repay — most personal loans and credit cards. Higher rates reflect the lender's higher risk.
- USDA Loan
- A 0%-down mortgage backed by the U.S. Department of Agriculture for homes in eligible rural and some suburban areas, with income limits.
- VA Loan
- A 0%-down mortgage guaranteed by the Department of Veterans Affairs for eligible service members, veterans, and surviving spouses. No monthly mortgage insurance.